The Road Accident Fund (RAF) has been much in the news, for the usual dispiriting reasons. The RAF is a very important, tax funded spender. It manages great complexity with over R50 billion of revenue and expenditure a year. A formidable amount that the Treasury expects to increase at an annual average rate of 19% p.a. over the next three years, from R53.1 billion in 24-5 to 89.7 billion in 2027/28.
The RAF, as a social service, and its 50 plus billion bill can be compared favourably, or is it unfavourably, with other kinds of tax funded expenditure. The old age grant now runs at 117bn, and the child support grant at R90.4b in a Social Development Budget of R422b. The RAF is estimated by the Treasury to have a negative asset value (liabilities over assets of R370b – rising to R423b by 27/28) Can South Africa afford such largesse? Could not other spending make a better claim? Or lower taxes be a better idea and win more votes than the RAF?
Fall off your bike or the mountainside, get bitten by a shark or a snake, drown in the sea river or lake and society commiserates and hopes your damages are covered by some insurance. Society cannot hope to do much more for the victim given a lack of resources. But, get unlucky on the road, have a car push you off your bicycle, or the pavement, and SA society comes to the rescue- very expensively.
The payments by the RAF are funded by a levy on the price for petrol and diesel, set at R2.18 rands per litre of unleaded petrol. That is now about ten per cent of the price paid at the pump. A stealth tax paid for benefits the wider public surely does not recognise very well. How many drivers/taxpayers are aware of how much they are paying for the RAF when they fill up. And who, other than the successful claimants on the fund, are aware of the scale of the benefits provided? Bad luck is not expected. It sadly just happens
Compulsory third party insurance elsewhere is typically covered by private insurance companies and the premiums they raise from vehicle owners. As it was once long ago in South Africa until superseded by the RAF – mistakenly surely.
According to the report of the RAF for 2023- 04, there were 79,377 new claims registered that financial year, and 63,015 claims settled. The average claim on the Fund had grown by 9.5% to R287,000. 159,122 such claims were made in 23-24, a sharp decline from the 374,000 claims made in 2019.
Total outlays of the RAF were R45 600 million in 2023-04, of which payments made to compensate for incomes lost were R21.6b, or a chunky 47% of all payouts. The average claim for earnings lost was R1.2m, So called general damages paid amounted to R12.7b or 28% of total payments made.
The Fund, out of financial necessity, has succeeded recently in reducing the number of personal claims made and improving the rate at which claims are paid out. And in reducing legal fees incurred. The sums paid out have increased at a slower rate from R42b in 2019 to R45.6b in 2024.
Further slowing down the growth in payouts is essential. A first step would be to ensure that the loss of future income, inflation adjusted, was appropriately discounted by the high after realised inflation yields available from the RSA available to any beneficiary with a lump sum pay out. Somewhere close to a real and certain 5% p.a. for ten years.
On a claim for the allowed maximum R350,000 of annual income lost, for say an agreed ten years, to which an agreed inflation rate of say 5% p.a. were added each year, the payout, equal to the present value of the future agreed income losses would be R3.4m when applying an 8% discount rate (5% inflation + 3% real) or close to R3m, R400,000 less when using a higher discount rate of 5 % p.a. above inflation.
Still much less would have to be paid out were the years of lost income more strictly limited, and the income inflation rate were assumed to be much lower. The accident victim could moreover be forced to buy a monthly annuity in exchange for the larger lump sums agreed. A regular source of income would be more socially desirable than a lump sum easily squandered. Insurance companies could compete for the lump sum provided by the RAF offering an annuity to be administered by them on behalf of the client. And collect the income tax due, as they do with any administered pension. A further way to reduce the net cost of the RAF.
The liability for the annuity offered would likely be matched by the insurer purchasing a government bond of similar duration. Hence helping to fund government debt, perhaps less expensively. Most important, vehicle owners could be encouraged to substitute private accident insurance for the RAF. It would need tax incentives to have them convert. The savings for the taxpayer of private third-party insurance could be immense. The RAF law would have to be amended to allow some of these changes essential for fiscal sustainability.
